China in 2004

The Economy

China’s quickly expanding but energy-poor economy was another serious challenge facing the new leadership. Much attention was given to the question of how to ensure a soft landing for the economy and improve the energy supply. Although China enjoyed a robust 9.1% GDP growth rate in 2003, it had to import about 50% of its crude oil to fuel the overheated manufacturing sector and residential demand. The demand for oil grew by 9% in 2003, double the 1992 level, and net oil imports in 2003 were more than twice the 1998 level. Oil imports rose by nearly 40% year-on-year in the first eight months of 2004. Even so, 24 out of 31 provinces, municipalities, and regions suffered from power blackouts in the first half of the year. Fiscal policy was tightened through a series of administrative regulations that were aimed at cooling investment, especially in such sectors as property development, automotive, steel, aluminum, and cement. More than 4,800 industrial development zones were shut down, and more than 1,300 sq km (500 sq mi) of land were returned to agricultural use. Investment grew 26% year-on-year in August, down from a 43% growth in the first quarter. Although the economic growth was as high as 9.8% in the first quarter and 9.6% in the second quarter, the government was expected to bring the overall figure for the year close to 8%. The growth in retail sales—especially in telecommunications equipment and household furniture—would ease the pressure on the economic austerity, and a soft landing was projected in 2005.

To ensure smooth development, a long-overdue reform of the banking system was needed. At the beginning of 2004, the State Council injected $45 billion into the Bank of China and the China Construction Bank to encourage corporate reconstruction by transferring assets into stocks. The goal was to introduce hard budget constraint to the banking system and, among other results, to implement more fully the central “financial retrenchments” policy.

GDP per capita exceeded $1,000 in 2004, and China faced a new growing pain; as the economy entered a “golden era of development,” social conflicts were expected to increase considerably. On the one hand, the better-developed coastal areas started to lose cheap labour and affordable land; on the other, increased wages put higher demand on housing, automobiles, education, leisure life, health care, and environmental protection. The increasing disparity between the advantaged and the disadvantaged in recent years had induced conflicting goals in government policies. The state had found it more difficult to satisfy different interest groups.

A quarter century of economic reform had produced a sizable middle class. A report of the Chinese Academy of Social Sciences estimated that 19% of the population had entered the middle-level income stratum, with family income between 150,000 and 300,000 yuan (about $18,000 to $36,000). This group had steadily increased by 1% annually in recent years. Those who first entered the stratum included business people in science-and-technology-oriented sectors; professionals in legal, financial, security, insurance, and accounting services; managers and executives in multinational corporations; and successful private businessmen. The Ministry of Labour and Social Security launched a new plan of training 500,000 “blue-collar high-tech experts” in the coming three years in order to meet the rising demand for labour in the manufacturing and services sectors. This group would also join the middle class in the near future.

Nonetheless, the labour market continued to face challenges from unemployment and the withering of the state economic sector. Reforms in the state sector continued to create surplus workers. The registered unemployment rate increased from 3.1% in 1998 to 4.2% in 2003. Among the 27.8 million workers laid off during this period of time, only 18.5 million had found new jobs. Under World Trade Organization regulations, the import of cheaper agricultural products would further reduce farmers’ income and job opportunities in rural areas. It was estimated that there were 150 million rural workers who did not have full-time jobs, and these people continued to migrate to the cities and the south, where the economy was better.

Special Administrative Regions and Tibet

Vigourous new development in the gaming industry boosted revenue and employment in Macao. Beijing expected some $1.1 billion in tax revenues from the industry in 2004. When the government deregulated gambling, foreign investors were able to compete with local hotel and casino owners, and a plan was unveiled by Galaxy, a U.S.-Hong Kong syndicate, in December 2003 to build a $1.1 billion resort complex. Experts predicted that in the next few years, the 26.8-sq-km (10.3-sq-mi) area would attract $3.8 billion investment in the gaming industry, which was enjoying a high degree of autonomy under China’s principle of “one country, two systems.” Elections in Hong Kong, however, ostensibly organized under the same “one country, two systems” principle, showed more controversy than freedom of choice. Beijing was accused of trying to influence the outcome, using tactics such as recruiting Chinese Olympic medalists to appear at events just before the election to present a positive image of the central government. In the event, the pro-Beijing camp won 34 out of 60 seats.

Progress was made on resolving the status of Tibet. The Dalai Lama openly acknowledged that Tibet was a part of China and sent high-level envoys to Beijing in September to discuss the possibiliity of the Buddhist leader’s return home.

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